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Eliminating Tax Debts in Bankruptcy and How to Determine if It’s Right For You

There is a common misconception among those who owe significant back tax debt that income taxes are never dischargeable in bankruptcy. But that's not entirely true. In fact, certain back federal, state, and local income taxes can be discharged in Chapter 7, Chapter 13, and Chapter 11 bankruptcy. So, while it is possible to discharge significant income tax debt in bankruptcy that fits within certain rules, determining which back taxes are dischargeable can be a very complex process.

That's where the 3-2-240 rules come into play. All requirements of the three rules must be met in order for an individual to discharge his or her back income taxes.

The debt is at least three years old. To begin assessing whether a taxpayer will be able to discharge back income taxes, the rule states that the tax return must have been due at least three years prior to filing for bankruptcy.

Income tax returns were filed at least two years prior. After determining when the three-year mark is, the taxpayer must have also filed a tax return for the debt in question at least two years prior to filing for bankruptcy. Additionally, this requirement allows the individual to be eligible for this section of the rule requirements even if the tax return was filed late, so long as he or she waits to file for bankruptcy two years after the late filing date.

Taxes must be assessed by the IRS at least 240 days prior. The final rule requirements mandate that tax debts must have been assessed by the IRS at least 240 days prior to filing for bankruptcy OR have not yet been assessed. The 3-2-240 rules are only applicable to income tax debts and not other types of taxes, such as property taxes. Additionally, if your income taxes qualify for discharge under a Chapter 7 bankruptcy filing, the ruling will not clear any previously recorded tax liens on your property. This will then require you to pay off the tax lien in order to do anything with the property.